Question

Stanford Semiconductors manufactures specialized chips that sell for $50 each. Stanford's manufacturing costs consist of variable cost of $6 per chip and fixed costs of $16,000,000. Stanford also incurs $1,800,000 in fixed marketing costs each year. Stanford calculates operating income using absorption costing—that is, Stanford calculates manufacturing cost per unit by dividing total manufacturing costs by actual production. Stanford costs all units in inventory at this rate and expenses the costs in the income statement at the time when the units in inventory are sold. Next year, 2014, appears to be a difficult year for Stanford. It expects to sell only 400,000 units. The demand for these chips fluctuates considerably, so Stanford usually holds minimal inventory. Read the requirements. Requirement 1. Calculate Stanford's operating income in 2014 (a) if Stanford manufactures 400,000 units and (b) if it manufactures 500,000 units. (Use parentheses or a minus sign for amounts to be subtracted.) Requirement (a) Revenues Variable manufacturing costs Fixed manufacturing costs Fixed marketing costs Total costs Operating income / (loss)

Answer 1

ANSWER

As per the given question,

A 1.A B Operating Income using absorption costing Units produced 400000 500000 Amount ($) Amount ($) Revenues 20000000 20000000 -50*400000 COGS Cost of goods sold 18400000 19000000/=E130400000 Marketing cost 1800000 1800000 Operating Income -200000 800000/=E4-E6-E7 =50*400000 =F13*400000 =F4-F6-F7 Manufacturing units Variable cost Fixed cost Total product cost per unit 400000 500000 2400000 3000000/=6*E10 -6°F10 16000000 16000000/=16000000 =16000000 46 47.5 =SUM(E11:E12)/400000 =SUM(F11:F12)/400000

2. Yes, it would be inappropriate to increase the production unit, whose order is yet to be placed. It will create a discrepancy in the income statement while reporting to the investors. Moreover, it would be unethical to overstate the income statement to earn incentives based on income generated.

3. No, it is not unethical at all for encouraging buyers for increasing the ordered quantity. In fact, this is how business works and increase its earnings beyond the budgeted estimates.

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